Unless you live on a yacht and have your own private island, chances are the last few weeks Covid-19 has taken some kind of toll on your finances. Many of us have been laid off, furloughed, had their pay cut, have unexpected medical bills, or are just worried about the future. When cash is tight, a lot of us have to turn to our credit cards to get us through the tough times.
But what’s the best way to handle your credit at a time like this? We spoke to Georgia Hussey, a certified financial planner and founder of Modernist Financial, based in Portland, Oregon about how to keep going during Covid-19 uncertainty while keeping your debt under control.
What’s your relationship with credit card debt?
“Before you start thinking about making credit cards a part of your day-to-day budgeting, take some time to face it,” said Hussey. “Your attitudes and history with credit card debt will affect the decisions [you] make now.”
For example, if you’ve relied on your credit card for emotional spending, now could be a good time to rethink your nonessential spending, and reconsider what is credit-card worthy and what isn’t.
Credit as a part of your budget
Hussey also recommends reviewing your budget and making a cash-flow projection, like all businesses do. (Every household is a business in its own way.) Don’t be intimidated, this just means making a Google or Excel spreadsheet of all your projected expenses and income. You can even download free templates off the internet or from Microsoft Office.
Stash also has a budget template you can use here.
A cash-flow projection will allow you to zoom out on your finances from day to day, week to week, and month to month. It will help you manage your cash flow by tracking and planning how much money is coming in, and how much is leaving your wallet and bank accounts.
This outflow of cash includes your fixed expenses. These are the bills that aren’t going to change, such as your rent or mortgage, electric, cell phone, and cable. You can set a budget for groceries and household supplies since we’re all going out less and can plan for trips outside.
Then, you tally your income and all the streams that come in from your salary, part time work, projected tax refund, stimulus check, and other sources. The goal is to have less going out than coming in.
“By creating [a budget] for this month, adding up the numbers, you can start to see where the holes may start to open up the next month, where we start to go negative,” said Hussey.
When you look at your budget into the next month, take a look at this gap. You may consider using your credit card to temporarily cover these purchases, or start to look at how you can modify other aspects of your budget, such as cancelling old subscriptions or for example, or asking your gym if it can put your membership on hold for three months.
Here’s another option. Erin Lowry, money blogger and the author of Broke Millennial, recommends creating what she calls a “doomsday budget.”
Lowry suggests switching to survival mode with a bare-minimum budget you create from scratch, rather taking your existing budget and looking for places to trim. “Figure out how much money you need in a month to cover basics: housing, food, medicine, and transportation,” she told Vice. “If you have debt, or bills that you can defer or reduce carrying costs on, get on that and include the minimum payments. Make sure you understand what affects your credit score.”
Consider a zero-interest credit card
Now might be a good time to apply for a zero-interest or 0% APR credit card, and roll over the debt you already have to start making necessary purchases and stop the interest from piling up.
Many credit card companies offer zero-interest credit cards to customers with good to excellent credit. It’s important to know that zero-interest doesn’t mean you’ll pay no interest on your purchases forever. Zero-interest credit cards are usually a teaser rate that expires after a certain time, such as 12 or 18 months. Then your interest rate will jump back up and you will start accruing interest on your balance and future purchases.
“Take advantage of zero-interest offers while the credit card companies are still offering them,” suggests Hussey. “This can help you make the purchases you need without piling on the interest.”
If you can, consider rolling over your credit-card debt onto a zero interest card to stop the interest charges of your existing card from bleeding money from your savings. Just be sure to read the fine print, many credit cards will make you pay a balance transfer fee between 3% and 5% of your total balance debt to the zero interest card.
Remember, when you apply for a credit card, it also triggers a hard inquiry on your credit report (when a potential lender looks at your credit history) which can affect your credit score. There may also be fees for late payments, cash advances, and other penalties for not paying on time.
Consider asking for a credit limit increase
The reason to raise your credit limit isn’t so you can spend more. If you’re suddenly planning to use more of your available credit, Hussey says doing this can “help right-size credit used vs. credit available.”
Your credit utilization rate, the amount of revolving credit you use in relation to the amount you have available, rate is an important aspect of your credit score. It’s generally recommended to keep your utilization rate at around 10 percent.
Something to note: Requesting an increase of your credit limit can affect your credit score, so keep that mind as you’re looking into your credit card options, especially if you’re applying for other cards.
Consider this time to get organized. If you plan to use your credit card to temporarily cover gaps in your fixed expenses during these rough times, such as for groceries, bills or emergencies, and car issues, make a backup plan on how to pay this debt back as soon as you can. That way you’re not racking up more debt.
Always pay your minimum
The nonprofit Credit.org recommends that you prioritize your monthly bills and continue to make your minimum payments on credit card balances.
This is essential, you don’t want to negatively affect your score at a time when keeping things status quo whenever we can is so important. If you’re experiencing a financial hardship, reach out to your credit card company as soon as you can to explain your financial situation, and they may be able to help you by waiving interest, fees, and adjusting your pay dates.